Testamentary Trusts

A testamentary trust is a form of trust that is established in your will. Unlike living trusts or inter-vivos trusts, a testamentary trust will only go into effect upon your death. A testamentary trust is a good way of establishing a trust for estates that are less than the annual estate tax rate and for preparing for unforeseen circumstances, such as a trust to care for your children should they be orphaned. A testamentary trust can also provide care for an incapacitated spouse or child upon your death.

Advantages and Disadvantages of a Testamentary Trust

A testamentary trust ensures that your estate will be distributed in a more controlled manner than an outright gift in your will. Your testamentary trust can be as complex or as simple as you see fit and can include spendthrift, discretionary and guardian provisions. If your total wealth is less than the annual estate tax amount, then your testamentary trust will not have any estate taxes attached. Finally, a testamentary trust gives you the ability to choose a responsible trustee to oversee your wealth and investments. This ensures that your surviving family will receive a larger amount overall.

One of the disadvantages of a testamentary trust is that it does go through probate–the legal proceedings of distributing the estate of a deceased person in accordance with a will. This happens because the testamentary trust was placed in your will and no property has actually been deposited into the trust to date. Normally, when a living trust is formed, the bulk of your property is placed into the trust in advance ensuring that nothing is lost or stolen during the transition and that your property will not go through probate.

Another disadvantage of a testamentary trust is that it will not be private. All of your assets will be transferred into the trust under the court’s supervision, leaving behind a public record of your wealth. Finally, if your estate is greater than the annual estate tax rate for that year, your surviving family will be responsible for paying estate taxes.

Establishing Testamentary Trusts for Minors

If you’ve begun your estate planning and don’t trust your children’s designated guardian to keep track of the wealth you leave behind for your children should you die while they are still minors, then a testamentary trust is a good option for you. Unlike a traditional trust, which is set up and receives property deposits while you are alive, a testamentary trust only goes into effect upon your death. Because a testamentary trust is established on your death, life insurance and other pay-upon-death accounts can be automatically deposited into the trust, keeping them out of the hands of creditors.

Testamentary trusts for minors are typically set up with specific instructions that payments only be made for the welfare, health, and education of your minor children. This ensures that the money is available when the children’s guardians need it, but that none of the funds go to waste.

Case Studies: Testamentary Trusts

Case Study 1: Controlled Distribution

Jane, a wealthy individual, decided to establish a testamentary trust to control the distribution of her estate. She wanted to ensure that her beneficiaries receive the assets in a more controlled manner, rather than outright gifts.

Her attorney helped draft a testamentary trust with spendthrift and discretionary provisions, allowing the trustee to manage the assets and distribute them according to Jane’s wishes. The case highlighted the benefits of a testamentary trust in providing long-term financial security for the beneficiaries.

Case Study 2: Ensuring Care for Minors

Michael and Sarah, parents of two young children, wanted to secure their children’s future in case of their untimely demise. They decided to establish a testamentary trust for their minor children to ensure that the wealth left behind is managed properly for their welfare, health, and education.

The trust allowed for automatic deposits of life insurance and other assets, keeping them safe from creditors and providing financial support for the children’s guardians. This case demonstrated how testamentary trusts are a valuable tool for parents to protect their children’s interests.

Case Study 3: Providing for Incapacitated Family Members

John, with a sibling having a disability, wanted to ensure lifelong care and support for his sibling after his own passing. He chose to create a testamentary trust with specific instructions for the care and limitations on fund disbursement to meet his sibling’s special needs.

The testamentary trust provided peace of mind to John, knowing that his estate would continue to provide for his loved one even after he was no longer around. This case exemplified the compassionate use of testamentary trusts to secure the future of incapacitated family members.

A Testamentary Trust for an Incapacitated Family Member

For those with spouses or children with disabilities, setting up a testamentary trust with specifications for care and limits on when the funds can be released can ensure that your estate provides for that incapacitated family member through their entire life.

If a testamentary trust sounds like a good estate planning option for you, contact an estate planning attorney for a consultation.